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Friday, 13 December 2019

The 2019 U.S. liquidity crisis

Something unusual occurred on 17 September 2019: a liquidity crisis in the American repo-market causing high overnight interest rates (ie, 6-10%). That incident was treated as a one-off event, which it was not. This liquidity crisis still persists despite the Fed pumping in 225 billion dollars for financing repo transactions since September 17 (FD).

Financial media have been looking for culprits. They have blamed the implementation of Basel III, which is currently due on 1 January 2022. They also blamed the Federal Reserve’s unwinding of its Quantitative Easing program(s). According to the Bank for International Settlements (BIS) "the reasons for the dislocations are still not entirely clear" (BIS, FD, Moneyness).

December 9 article in the Dutch FT claims that hedge funds are responsible for the increase in repo interest. I agree that hedge funds will increase such "dislocations". However, I doubt that hedge funds created this problem as they typically leverage on existing opportunities. Still, a liquidity crisis in the banking system is unusual and often the bearer of bad news.

Another December 9 article in Dutch newspaper Trouw caught my interest: the Dutch Central Bank complains that small and medium sized companies are saving too much money.

The various financial crises have caused a decrease in lending (ie, deleveraging) and an increase in savings. This shift started with consumers, then companies, and then commercial banks. The decrease in lending by commercial banks even reiterated this process.

Central banks are the lenders of last resort which caused an explosion of their balance sheets. Hence, these BIS "dislocations" might well be structural. In my 2018 blog, The 2020 recession: who will be hit?, I noted that nations and central banks may not be safe in the next recession.

The Fed's unwinding of its Quantitative Easing program(s) is equal to a deleveraging of its balance sheet. Hence, one could argue the Fed is the culprit. It's not that simple. The issue of excessive U.S. debt is related to high consumer spending, low savings, and inadequate taxation, following ongoing political promises. Sometimes you wonder if the U.S. economy is make-believe.

On December 10, CNBC reported that "Credit Suisse’s managing director for investment strategy and research" issued a "shocking call: Fed will launch ‘QE4’ before year-end to stem Street cash crunch". CNBC: "A fourth round of quantitative easing will be needed before year’s end to address stresses in short-term lending markets".

I've been worried about a new global (economic, financial and military) crisis for quite a while. Any crisis (eg, liquidity) is about trust, distrust and/or mistrust. Trust is probably also the ingredient that has been missing in many societies around the globe for quite some time.

Money's Too Tight (To Mention) - 1982 - The Valentine Brothers 

Money's too tight to mention 
Oh money, money, money, money, money 
Money's too tight to mention 
I can't even qualify for my pension


Note 1: all markings (bold, italic, underlining) by LO unless stated otherwise.

Note 2: this is the 1982 original. The 1985 cover by Simply Red was an international hit.

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